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Riding through the (research) valley of death

Care to ride into the “valley of death” with Pete Hodgson? The Minister for Research, Science and Technology wants more new science-based business ventures and that valley is in his way.

Hodgson has a raft of initiatives, including possibly more tax changes, on his agenda as research, science and technology (RS&T) policy increasingly emphasises getting more economic return.

A strategy statement has been developed over the past four months for release early in 2003. Government science agencies called for a strategy in their post-election briefings to ministers.

The initiatives aim to flesh out the skeletal “growth and innovation framework” (note, not “strategy”) that was the core of the Prime Minister’s annual statement to Parliament in February 2002. RS&T is critical to the framework’s aim of lifting the economic growth rate and so the capacity to build strong health and education services.

“There’s a subtle change going on,” says James Buwalda, chief executive of the Ministry of Research, Science and Technology (MoRST). “Research has to create new business ventures.”

Hodgson puts it this way: “It is clear we’re about to have a change in the way science is done. It is not radical but it is essential.” He describes the government’s approach as “rapidly incrementalist”.

It needs to be rapid. RS&T commentators talk of a “missing $1 billion” of non-existent private sector research needed to bring total RS&T spending up to the OECD average. The Foundation for Research, Science and Technology (FoRST) through which most government RS&T spending is channelled, says there is “little hard evidence that the public investment in RS&T over the past decade is driving high and sustainable economic growth”.

There is also an horizon 0: protection of environmental and social wellbeing. That includes research into the environmental and socioeconomic effects of genetically modified organisms.

Hodgson’s emerging strategy has three elements, which he prefers to call “lenses” through which he views policy:

* The first is a focus on national priorities and needs. This means better aligning government RS&T spending with specified priorities — Hodgson cites marine biodiversity, biosecurity and methane reduction — within the “growth and innovation framework’s” three priority sectors, biotechnology, the creative industries and ICT (information and communications technology).

FoRST has embarked on this through a more contestable funding process. Most notably Hort Research lost funding and has had to mine its balance sheet to recover.

Hort Research is one of the government’s Crown research institutes (CRIs). Some CRI funding has been diverted into 50:50 public-private research “consortia”. These are to do basic research in the priority areas (and incidentally prise some of that “missing $1 billion” out of the private sector).

Four consortia were announced in December and two more are close to announcement. They include, for example, a programme to develop pharmaceuticals from milk — research that doesn’t just produce from milk a better powder or a high-value speciality cheese but a completely different product.

Though the consortia do basic research, Buwalda says, they have a business focus, geared to the government’s desire for new science-based high-value businesses.

The principal exception to the sectoral focus is “excellence” research.

The main vehicle for that is the government’s Marsden fund, administered by the non-government Royal Society of New Zealand. This invests in excellent researchers, regardless of the field and the likely economic spinoff — though frequently such work does lead to commercialisable ideas, according to Uniservices, Auckland University’s commercialising arm, of which more than half come from the Marsden fund.

And this year a number of “centres of excellence”, also administered by the Royal Society until the Tertiary Education Commission gets fully into operation, have been named in universities.

* Hodgson’s second “lens” is strengthening and ensuring capability.

This means recruiting high-quality researchers and resourcing them. “Scientific progress is made through developing excellent people”, the Royal Society says.

But FoRST says a fifth of those top scientists to whom it has given fellowships are overseas. Commentators say there is widespread agreement scientists are underpaid compared with overseas scientists and alternative professional occupations here.

Hodgson prefers to focus on gaps in the range of capabilities: for example, “bioinformatics”, the ability to manage information coming out of biotechnological research; and horizontal gene transfer technology may require soil scientists, which has previously been seen, he says, as an “unsexy” science.

Capability also includes “connectedness” with overseas researchers and institutions, especially Australia. New Zealand is buying into a planned crystallography unit in Melbourne, which this country could not afford by itself.

Hodgson says capability also involves relaxing the competitive approach introduced by his National precedessor, Simon Upton, who set up the CRIs as companies in 1992. He wants more collaboration.

* Hodgson’s third “lens” is extracting greater value from RS&T.

This is the “valley of death” territory. It is an American phrase depicting a gulf in funding between the funded research phases (mostly in this country funded by the government) and the phases in which private funding or capital builds a fully-fledged commercial company. Many research ideas die in this gulf.

New Zealand scientists produce a lot of ideas by world standards: the fourth highest level of publication of papers by comparison with GDP in the OECD, with twice the average level of international co-authorship and near-average citation rates, FoRST says in its annual progress and achievements report.

“A critical success factor is how easily a New Zealand-based developer of a new product can progress to the point where external finance becomes available. Many promising products and services fail to make it through the pre-seed, seed and startup/early stage expansion phases, during which the net cash flows for the product are negative. It is in these stages that firms’ costs are often heaviest and bank loan or venture capital finance are hard to obtain,” FoRST says.

Royal Society chief executive Steve Thompson draws an historical picture of funding which shows a disproportionately heavy concentration on CRIs research activities by comparison with commercialising the ideas that and other research throws up (and also, Thompson says, compared with the “excellence” activities).

Hence FoRST’s emphasis on the second and third horizons. Among its initiatives will be the extension of its technology for business growth grants to cover the whole of a project’s life through to early commercial development, with more focused case-management support, and replacement funding for research teams that are spun off to commercially develop an idea when there are no private sector partners available.

Last year Hodgson raided CRIs’ balance sheets to set up a venture investment fund using private and public capital to get firms into and through the startup stage. This has, however, yet to fire.

He wants CRIs to take more risk — by, as he puts using their balance sheets to fund commercialisation of promising ideas by taking on loans or running down capital with the assurance that he will back them if they fail. Industrial Research Ltd is already “significantly in debt”, he says, funding commercialisation of ideas.

What constitutes acceptable risk will be up to CRI boards. Hodgson will want to know from CRI boards if an opportunity is missed. He will be expecting boards to develop a good intellectual property policy. And he wants a more flexible attitude to keeping the door open to scientists who leave for a stint in the private sector.

Most recently, Industry New Zealand has got into the act. The rationale is that INZ can steer towards FoRST’s Technology New Zealand programme a company which might not otherwise have thought about it. Technology New Zealand helps companies develop ideas into commercial products.

At first glance, Industry New Zealand’s intrusion seems to risk duplicating the work of entities which already promote research discoveries into small companies — Auckland University’s successful Uniservices, for example, or CRI AgResearch’s Celentis.

But Industry New Zealand insists it will not. It says it is adding one more avenue — the Technology New Zealand programme — to its array of pointers to firms about how to grow and expand.

And in fact FoRST is proposing the likes of Uniservices and Celentis have better access to its technology for business growth grants.

Another dimension is tax. To encourage business to do more development of research ideas, Hodgson and advisers point to several tax issues being examined:

* the rule that classes as taxable income instead of untaxed capital gain the proceeds of an investment made with the intention of exiting later (which is what venture capitalists do);

* the currently tight rules about carrying losses through a change of business, which can be a feature of funding startups;

* the rules governing share options as an incentive for researchers to follow through their ideas; and

*the tax status of venture capital vehicles, to encourage institutional investors into the game — Finance Minister Michael Cullen has hinted at copying some “Australian naughtinesses”, such as being taxed at home country rates for foreign investors in approved enterprises.

MoRST’s Buwalda says companies are also still coming to terms with the tax change two years ago that allows development spending to be fully deducted so there is some flow-through to come from that.

Is all this emphasis on commercialisation a good thing? By and large yes, says the Royal Society’s Thompson, despite the society’s principal focus on “excellence” research.

But he also warns against taking it too far: two provinces in Canada which went heavily for commercialisation of government agencies’ research sparked a short-term bonanza which fizzled out when underfunding of research meant there were not enough new ideas coming through.

Might New Zealand fall into the same trap? Not if it keeps its focus also firmly on basic research. That Hodgson seems determined to do.

SIDEBAR

So you don’t know much about science? The government has plans to wise you up.

Public forums on science are included in a raft of proposals for next year by the Foundation for Research, Science and Technology (FoRST), which allocates most of the government’s funding for research and development (R&D).

The initiative recognises the need for public buy-in to R&D funding at a time when science is under attack from campaigners against genetic modification and when funding for higher-profile health and education services is constrained. A survey of public attitudes in April found much public ignorance and suspicion of science and scientists.

So FoRST will “facilitate a series of open science forums” in collaboration with the Association of Crown Research Institutes, the [universities] vice-chancellors committee and “other public bodies”. These are not defined but the Royal Society has an active programme of public education.

Slugged “foundations for success”, FoRST’s forums will “showcase research, science and technology in public meetings and promote discussion with leading New Zealand commentators” about research and what it has done for the country.

“It will also describe the research we plan to do and what it might achieve.”

Ministry of Research, Science and Technology James Buwalda talks of a need for “dialogue” rather than just promoting science. He sees New Zealand society as “risk-averse”. Hodgson talks of a new science and society fund, recognising that science must be informed by as much as informing society.